• Save
Bpsm 1st assignment
Upcoming SlideShare
Loading in...5
×
 

Bpsm 1st assignment

on

  • 1,586 views

 

Statistics

Views

Total Views
1,586
Views on SlideShare
1,586
Embed Views
0

Actions

Likes
0
Downloads
0
Comments
0

0 Embeds 0

No embeds

Accessibility

Categories

Upload Details

Uploaded via as Microsoft Word

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

Bpsm 1st assignment Bpsm 1st assignment Document Transcript

  • Department of Business Administration. Assignment no.1 BUSINESS POLICY AND STRATEGY (887)Submitted ToMost Respectable,Prof.Haroon Azeem Submitted By Engr.Waseem Saeed Roll AD-512530 Semester 3‘ rd ALLAMA IQBAL OPEN UNIVERSITY ISLAMABAD, PAKISTAN. Spring 2010 1
  • Q. 1 Develop your vision and mission statement for an organization of your choice from broadcasting sector and compare your vision and mission statement with the original vision and mission statement of that organization.Answer: Broadcasting means any communication or transmission ofany message or signal to the public by means of any electronic apparatus. The world is changing all around us. To continue to thrive as abusiness over the next ten years and beyond, we must look ahead,understand the trends and forces that will shape our business in the futureand move swiftly to prepare for whats to come. We must get ready fortomorrow today. It creates a long-term destination for our business andprovides us with a "Roadmap" for winning together with our bottlingpartners. For any business to succeed, even a business consisting of oneindividual, it (he/she) needs to know what theyre about - what, precisely,it is that they do. The mission statement describes the "what" of yourbusiness. It states why your organization is in business and what you arehoping to achieve. 2
  • A Typical Mission Statement contains three components:1. The overall purpose of your business - what are you trying to achieve,why are you in business2. What your business does - products and services it provides3. Whats important to your business - the values your businessThe vision of this policy is a diverse, responsible and viable broadcastingsector whereas;The Mission is to provide guidance and a framework for a co-ordinatedbroadcasting industry.The broadcasting sector plays a pivotal role in the mobilization of themasses for the socio-economic development of any country. 3
  • MY VISION AND MISSION ORIGINAL GEO MISSION AND STATEMENT VISION MY MISSION GEO MISSION GEO informs and entertains whileEach of us is born with a natural desire celebrating cultures and promptingto learn. We seek to explore our worldand to understand life and the people dialogue in the Spirit of around us. . "Live and let live".For broadcasting sector in which global media group that enriches people‘slives through information, interaction and entertainment with programmesand services that inform, educate and entertain. The vision is to provide diverse, responsible and viable broadcasting sector. 4
  • My vision GEO visionMy Vision lies on becoming recognized GEO will be the voice of freedomas the most reliable and professional from the Asian subcontinent. It willconsulting provider while maintaining highlight the issues of concern andbest practices, good ethics, and the cultural richness of its peoplekeeping first-class standard in through information, discussion andbroadcasting sector. And I believe that entertainment. GEO will propagateAudiences are at the heart of everything transparency of responsibility thatwe do. We take pride in delivering will ensure its position as the mostquality and value for money. Creativity credible and meaningful source ofis the lifeblood of our organisation. We information, through qualityrespect each other and celebrate our programming based on issues. GEOdiversity so that everyone can give their will provide entertainmentbest. audiences can relate to, thereby creating viewer loyalty and response.I express my vision into four different GEO will forge an alliance amongstarrays to cover all areas of our its three stakeholders - viewers,broadcasting sector. advertisers and shareholders toOur clients Our mission to clients is to maximize viewer ownership.assist them and ensuring the absoluteoutcome. 5
  • GEO will invest in human resourcesOur business partner I aim to establisha long term companionship with our as it recognizes it to be thebusiness partners by sharing vision and foundation upon which the GEOexpertise aiming to reach mutual future will be built. It is this veryaccomplishments as well as client‘sachievements. foundation that will allow GEO to attain and sustain a leadershipOur employee Our vision for position, thus fulfilling the promiseemployees is to be the firm of choice associated with its creation.‖by offering the range of opportunities The Geo logo represents manysuch as fair treatment, work-life aspects of its business in true colors.balance, continuing education, suitable The Orange represents ―DAY‘ andincentives to improve people Blue represents ‗NIGHT‘. The Urducapabilities as well as improve overall alphabet ‗Jeem‘ cutting through fromorganizational performance. the TV Screen in a sharp angleOur shareholder For shareholders, connote the ‗GLOBE‘ and the overallI aim to at all times keep the formation of the compositecompany sustainable and profitable, represents ‗EYE ON WORLDand yet we protect and give them their AFFAIRS 24 HOURS Ainvestor rights and the availability to DAY‘company information. 6
  • However, the broadcasting sector has operated without anexplicit national policy. This is partly due to the fact that the airwaveswere liberalised before any policy was developed or law enacted. Thistrend of events led to the uncoordinated development of the broadcastingsector and the need for a national broadcasting policy that addressesconcerns of the broadcasting industry cannot be over-emphasised. It isagainst this background that a broadcasting policy has been developedthrough a participatory process involving stakeholders from the grassrootsto the national level. The policy aims to ensure that the industry isregulated and the public are assured of quality broadcasting. Government is committed to providing a conductiveenvironment for the continued development of the broadcasting industry.To this end, it needs to provide a policy framework, which will enable thebroadcasting industry to develop in line with the overall long-term visionof the country. I wish to acknowledge the efforts of all stakeholders whocontributed to the preparation of this Policy. The policy was developedafter extensive consultations both at the grassroots and at the nationallevel. The broadcasting policy will yield a broadcasting system based onaccess to and diversity of information, promotion of national unity,democratisation of the airwaves, and education of communities andstrengthening of the moral fibre of society. 7
  • SWOT AnalysisGeo has several powerful strength on which to build, but our majorweakness is bureaucratic environment. The major opportunity increasedemand for good quality entertaining events in these tense times STRENGTH: 1. New ideas and concept with fast execution has become a trademark of GEO --‘Fastest Firsts‘. 2. Unbiased, accurate and timely 24-hour news in ‗Urdu language‘. Most competitive work team. 3. Strong brand image 4. Biggest viewer ship advance technology 5. First to bring the Breaking News concept in Pakistan 8
  • 6. First channel with international graphics applications. 7. First to have live link-up with USA & UK in Pakistan 8. First to introduce segmented News sections like GEO Travel, GEO Dunya, GEO Taleem, GEO Entertainment.WEAKNESS: 1. Bureaucratic environment 2. Lack of focus 3. It is a newly established company so it is still under the learning process. 4. Because Pakistan has no institute that provides formal education on this field they are required to have all employees trained from foreign institutions 5. Lack of innovation in the entertainment scene. 9
  • OPPORTUNITIES: 1. Demand for quality entertainment 2. Growing awareness about GEO of the people. They are attracted towards entertainment. 3. Opportunity for increasing customersTHREATS: 1. Intense competition 2. Retention of employee‘s 3. unstable political situation 10
  • Geo network is a subsidiary of Jung Media Group whose CEO is MirIBARAHIM REHMAN. It comprises of a set of four different channels, namely, GeoNews, Geo entertainment, Geo Super, AAG. The programs are distributedthrough a cable network. The main product through Which Geo earns itrevenue is airtime. The marketing department is divided into twodepartments i.e. product marketing which deals with programs and eventswhile the other is trade marketing which deals with airtime. Therefore, thismarketing plan mainly concerns with the marketing strategies related toairtime. The market of electronic media is expanding with increasingspeed, causing an intense competition among the industry participants Geopositions itself around its ideology of tolerance ―Live and let live‖ or "Geoaur jeenay do" which gives us the message of accepting our differencesand working together towards nations development. Unlike otherchannels which just focus on bringing news (or entertainment) to theviewers, Geos ideology is very vast, very grand and very macro. Not justcommitted to provide news, entertainment and information to the viewers,we at Geo are committed to invoke the thinking of tolerance and progressin the nation. As it gives a message ―loud and clear‖.Critical Issue As a running business, geo is still in the growth stages. Thecritical issues are for geo to consider:Retain its market leader ship Pursue control growth that dictates that payroll expenses will never exceed the revenue. This will help protection 11
  • against recessions constantly monitor customer satisfaction insuring thatthe growth strategy will never compromise service and satisfaction levels.Key to Success The key to success is designing and producing products thatmeet market demand. In addition Geo must ensure total customersatisfaction. If these keys to success are achieved, it will remain a profitableand sustainable company.CUSTOMER SERVICE Geo strives to achieve bench marked level of customersatisfaction researchers have identified the following five determinants ofservice quality.RELIABILITY: Providing service as Promised Dependability in handling service Providing service at the right time Maintaining error free recordsRESPONSIVENESS: Willingness to help Keeping customers informed Responding to request 12
  • CONTROL AND IMPLEMENTATION: We are planning tight controlling majors to closely monitorcustomer service satisfaction this will enable us to react quickly incorrecting any problems that may occur during the implementation ofmarketing strategies we may also need contingency plans to address issuessuch as fast moving technology and more competition In addition, thepolicy seeks to promote local capacity building and protect thebroadcasting industry. The key elements of the Policy are:Policy Area 1: Institutional Framework. This area seeks to establish an institutional framework thatwould facilitate policy formulation and development by Government,licensing and regulation by the Broadcasting Council, and serviceprovision by broadcasters.Policy Area 2: Public Broadcasting This area will establish a public service broadcaster with aview to providing access to programming of both a local and nationalcharacter, with specific licence obligations, which reflect the priorities ofthe Ugandan public.Policy Area 3: Commercial Broadcasting This area seeks to establish commercial broadcasters who willcontribute to the promotion of culture and empowerment of the poor andvulnerable groups in society while remaining commercially viable. 13
  • Policy Area 4: Community Broadcasting This area seeks to promote broadcasting which is for, by andabout specific geographical communities or communities of interest, whoseownership and management is representative of those communities, whichpursues a social development agenda and which is not-for-profit.Policy Area 5: Subscription Broadcasting This area will cover Subscription or pay radio and television inUganda and its license obligations considering its unique means of servicedistribution.Policy Area 6: Signal Distribution The regulatory strategy for signal distribution is to achieveuniversal access to Services and facilities by ensuring that: Signal distribution will put in place a flexible tariff structure; Access to antennae sites will be accorded equitably to all service providers; Priorities for signal distribution will reflect the country‘s economic growth and development goals; Ugandans have control of terrestrial signal distribution; and Environmental concerns are taken into account. 14
  • Policy Area 7: Digital Convergence and Multi-Media This area introduces multi-channel delivery systems to servesocial goals, cost efficiency and effectiveness. These systems should play asignificant role in meeting the following goals: Providing access by all Ugandans to broadcasting and multi-media services; Delivering of educational services; Enhancing competition in the delivery of services between satellite and terrestrial media; Diversifying programme content and services in various languages; and Taking advantage of convergence of technologies, which is a worldwide trend.Policy Area No 8: Digital Broadcasting This area is intended to prepare Uganda for the transition fromanalogue to digital broadcasting as dictated by technological change andrecommended by the ITU.Policy Area 9: Broadcasting and Human Resources Development This area seeks to ensure that broadcasting supports theprovision of education and information especially to those sections thathave no access to formal education. It also aims to ensure the provision ofknowledge and skills for professional development in the broadcast sector. 15
  • Policy Area 10: Ownership and Control. This will ensure regulation of ownership of the broadcastingindustry and signal distribution to safeguard pluralism, diversityandnational interest.Policy Area 11: The Film and Music Industries The area aims at streamlining the operations of the film andmusic industries as well as promoting local production and talent.Policy Area 12: Advertising This area deals with developing and regulating the advertisingindustry in Uganda.Policy Area 13: Broadcasting, Democracy and Good Governance This area is to ensure that Broadcasters play a crucial role inproviding a level playing field in the electronic media for all political actorsso as to promote diversity, good governance, human rights and democracy.Policy Area 14: Broadcasting Frequency Planning and Allocation This area is to ensure that the frequency allocated tobroadcasting is planned and allocated according to internationally -accepted standards while keeping in mind public interest objectives. 16
  • Policy Area 15: Broadcasting, Pornography and Violence. This area is to ensure the protection of the public, especiallyminors, from unregulated pornographic and violent programming in thebroadcast media.Improve the safety of journalists and media workers through improvedmonitoring, risk awareness and conflict sensitive journalism training,development of risk response mechanisms, and advocacy and lobbyism. 17
  • Q. 2 (a) As a manager of any service organization, how would you identify and analyze strategic gap?Answer: WHAT’s GAP? In business and economics, gap analysis is a tool that helps acompany to compare its actual performance with its potential performance.At its core are two questions: "Where are we?" and "Where do we want tobe?" If a company or organization is not making the best use of its currentresources or is forgoing investment in capital or technology, then it may beproducing or performing at a level below its potential. This concept issimilar to the base case of being below ones production possibilitiesfrontier. The goal of gap analysis is to identify the gap between theoptimized allocation and integration of the inputs, and the cur rent level ofallocation. This helps provide the company with insight into areas whichcould be improved. The gap analysis process involves determining,documenting and approving the variance between business requirementsand current capabilities. Gap analysis naturally flows from benchmarkingand other assessments. Once the general expectation of performance in theindustry is under stood, it is possible to compare that expectation with thecompanys current level of performance. This comparison becomes the gapanalysis. Such analysis can be per formed at the strategic or operationallevel of an organization. 18
  • Gap analysis is a formal study of what a business is doing currently andwhere it wants to go in the future. It can be conducted, in differentperspectives, as follows:1. Organization (e.g., human resources)2. Business direction3. Business processes4. Information technology Gap analysis and new products The need for new products or additions to existing lines mayhave emerged from portfolio analyses, in particular from the use of theBoston Consulting Group Growth-share matrix, or the need will haveemerged from the regular process of following trends in the requirementsof consumer s. At some point a gap will have emerged between what theexisting products offer the consumer and what the consumer demands.That gap has to be filled if the organization is to survive and grow. To identify a gap in the market, the technique of gap analysiscan be used. Thus an examination of what profits are forecasted for theorganization as a whole compared with where the organization (inParticular its shareholders) wants those profits to be represents what iscalled the planning gap: this shows what is needed of new activities ingeneral and of new products in particular. 19
  • We often come across companies that have set an ambitiouslong-term goal, perhaps to double revenue and profits over five years, or todramatically increase the proportion of revenues coming from newbusinesses, but have devoted almost no intellectual effort to thinkingthrough the medium-term capability-building program that is needed tosupport that goal. In too many companies there is a grand, and overlyvague, long-term goal on one hand . . . and detailed short-term budgetsand annual plans on the other hand. . . with nothing in between to link thetwo together. . . . There seems to be, in many companies, an implicitassumption that the short term and long term abut each other, rather thanbeing dovetailed together. But the long term doesn‘t start at year five of thecurrent strategic plan. It starts right now! Long-term goals and detailed, short-term budgets, with nothingto link the two together. Does this organization sound familiar? Whateverthe answer, most business professionals understand that achieving a long-term goal requires a series of logical, achievable, sequential steps.Organizations cannot rely on chance or luck. Yet the steps that lead fromwhere a business is today to where it wants to be— its objectives—often aremissing. 20
  • The Strategy Gap The ―strategy gap,‖ Often unseen, the gap is a threat tothe future performance—and even survival—of an organization and isguaranteed to impact the efficiency and effectiveness of senior executivesand their management team. Imagine for a moment that you are early in your chosencareer and the thought of retiring is many, many years away. However,your objective is to retire early, perhaps at 55. To achieve this objective, youhave to start planning and executing the plan today. It is no use waitinguntil you are in your 40s to start executing the plan; it will be too late andyou will need to push that retirement date out much farther than desired.Or consider an oil tanker navigating its way into a port. Newton‘s law saysthat a body in motion tends to stay in motion unless something changes it.An oil tanker weighing 500,000 tons requires over an hour and six milesjust slowing down from 15 knots. This means that the plan to stop has to beexecuted well in advance of the intended result. It is the same in business. Organizations must plan andstart executing that plan today if they expect to achieve their objectivessome time in the future. Yet surveys indicate that this just is not happening.Despite the increased spending on systems and the technological advancesin recent years, only 33 percent of executives take advantage of electronicdecision support tools that could help them in managing performance.The failure of organizations to manage the transition from where they areto where they want to be is one of the most critical management challengesfacing senior executives today. 21
  • FAILURE OF STRATEGIC PLANS According to the dictionary, strategy is ―a plan,‖ ―anapproach,‖ and ―a line of attack.‖ There are many different types ofstrategy, which will be discussed in the next chapter. For now, considerstrategy to be ―the art of guiding, forming, or carrying out an action plan.‖When applied to business, strategic planning is about deciding where anorganization wants to go and how it is going to get there. Strategic planning is still the most widely used tool formanaging the performance of an organization. In Bain & Company‘sannual survey of senior executives from around the world, 76 percent ofthese executives said they look to strategic planning as the topmanagement tool to improve long-term performance and to strengthenintegration across an organization. Despite the appearance of many othertools, the report states that senior management trusts familiar tools duringdifficult times. Strategic plans typically have a structure that makes themeasy to follow.Most start by stating the purpose of the organization, which is usuallyfollowed by documenting the long- and short-term goals and the plans forachieving these goals. However, the terminology contained within theseplans often varies between organizations, and the words have differentmeanings. In the context of this book, these definitions will be used:• Mission. A concise statement of the organization‘s reason for existing• Objectives. Broad statements describing the targeted direction• Goals. Quantifications of objectives for a designated period of time 22
  • • Strategies. Statements of how objectives will be achieved and the majormethods to be used• Tactics. Specific action steps that map out how each strategy will beimplemented• Key Performance Indicators (KPIs). Measures of performance that showprogress of each tactic in reaching the goals For its Apollo space program,for example, NASA‘s strategic plan may have looked something like this:Mission: Lead all other nations in the race for space.Objective: Send a man to the moon and bring him back alive.Goals: Be the first to do it. Do it by the end of the decade.Strategy 1: Investigate and select safe landing sites for manned missions.Tactic 1: Create and launch a series of unmanned spacecrafts to take andtransmit high-quality pictures of the moon back to Earth for scientificstudy.KPI 1: Launch moon reconnaissance spacecraft by the middle of year 2 ofthe plan and analyze photos by the end of that year. 23
  • MANAGEMENT-INDUCED GAPSManagement can cause a gap between strategy and execution through bothaction and inaction. Four main ways management causes this gap includefailure to secure support for the plan, failure to communicate the strategy,failure to adhere to the plan, and failure to adapt to significant changes.Failure to Secure Plan SupportThe senior management team must develop a strategic plan withobjectives, goals, strategies, and tactics that everyone supports. If people donot accept and support the plan, they are unlikely to put in the rightamount of effort to make it succeed. Their allocation of resources may becounterproductive to implementing strategic initiatives, while theirmanagement time is diverted into seeking out factors that will justify theirposition. This misplaced time and effort will lead to a gap, which couldprevent the execution of the plan.To achieve buy-in, management must create a corporate culture and a setof values that support the vision and guide employees‘ decisions andbehavior. Employees must have the opportunity to provide feedbackregarding their ability to implement strategy. Not listening to their views,not addressing—and resolving—conflicts and major differences of opinion,and not building a learning culture—one that tracks and learns from itsown successes, failures, and mistakes—will result in strategies that areunrealistic and cannot be implemented. This situation leads to the strategygap. 24
  • Failure to Communicate the Strategy Operational managers and their employees are typically thepeople within an organization who implement strategy. They need toknow how the strategy impacts them. Yet according to research by Kaplanand Norton, creators of the Balanced Scorecard, ―less than 5 percent of thetypical workforce understands their organization‘s strategy.‖8 Without aclear idea of what the strategy, vision, and direction of the organization are,they are unlikely to act in ways that will result in effective implementationof the corporate plan. Communication of strategy is vital in all managementprocesses. When budgeting, employees need to see the tactical plans andrelated targets that affect them so they can modify their behavioraccordingly. During the year, they need to assess how well they arecarrying out those tactics and the progress they are making towardstrategic goals. When forecasting, employees need to know when theiractivities are unlikely to achieve their KPIs and, hence, their strategic goalsso they can act early to bring the tactical plan back on target. Technologyclearly has a role to play in facilitating this communication. Failure toeffectively communicate strategy and how well or poorly it is beingimplemented will result in the strategy gap.Failure to Adhere to the Plan As the year progresses, many organizations make decisionsreactively rather than strategically. Often the cause is the reporting ofresults based on a purely financial view of the organization, such as on thechart of accounts by cost center, rather than by a strategic and tactical view. 25
  • As a result, operational managers focus on financial variances that do notre late to the specific strategic initiatives outlined in the plan. To put thingsback on track, the accounts become the target of any decision rather thanthe agreed-on action plans, which may have long been forgotten.Test this for yourself. In your current reporting pack, how many of thereports tie actual and forecast results back to the strategies outlined in thestrategic plan? The reports may monitor the goals, but how many of themactually monitor KPIs by tactic? Without this link, organizations are likelyto act and react in ways that are divorced from the strategic plan, whichresults in the strategy gap.Failure to Adapt to Significant Changes The reality of today‘s business environment is that itcontinually changes. Strategic plans are built on a set of assumptions, suchas market growth, production capability, and competitor actions. If theseassumptions change, it is unlikely that the plan will still hold true.Following the attacks of September 11, 2001, for example, mostorganizations found themselves in an economy that was substantiallydifferent from the one that existed when they planned earlier in the year.Continuing to follow a plan when the basic assumptions on which it wasfounded have changed makes no sense. Unless plans are modified to reflectchanges to these assumptions, the result will be the strategy gap. 26
  • PROCESS-INDUCED GAPS The traditional processes an organization uses to implementand monitor strategy are the second set of strategy gap causes. Once astrategic plan has been researched and created, what happens next? How isthe plan translated into action? How are the organization‘s assets allocatedto the various strategic initiatives? How is progress monitored and thesuccess or failure of tactics measured? For most organizations, the key toolused to implement strategy is the annual budget, while the processes ofactual reporting and forecasting are used to monitor achievement. But theway in which these processes are approached can lead to the strategy gap.Lack of Strategic Focus: The objective of any process will determine what getsmeasured, by whom, and how far in the future. It may seem obvious thatthe budget should support the implementation of strategy. After all, thepurpose of this tool is to control how resources are allocated, which in turnaffects what an organization accomplishes. It also may seem obvious thatone of the roles of reporting would be to monitor strategic progress.Unfortunately, there is very little evidence to support that these processesactually achieve this. In the report ―Driving Value through StrategicPlanning and Budgeting,‖ the authors cite a lack of strategic focus as one ofthe criticisms of traditional planning and budgeting. Instead of beingfocused on long-term business health, traditional planning and budgetingare internally driven and focused on current-year profits. 27
  • In a survey conducted by Co share, incorporated,participants said that there is typically a gap between the strategic plan andthe budget created to support it. The budget tends to be financially focusedwith emphasis on the chart of accounts by cost center, while the strategicplan tends to be behaviorally focused on strategies and tactics. The result isthat budget holders, operational managers, and senior executives are oftenunaware of how strategic initiatives impact the operating plan or whetherresources have even been allocated. Without this linkage, the budgetbecomes a pure numbers exercise, allowing the strategy gap to emerge. Asa result, the budgeting and planning processes actually become barriers tostrategy deployment. The same is also true when it comes to reporting actualresults and forecasting future performance. For many organizations,reporting of actual takes the form of a simple income and expensestatement by department, based on the chart of accounts. The reasonreporting takes this form is mainly because the general ledger holdsincome and expense items, and these systems are used to generate thereports. However, strategic plans, which are typically action, basedand measure activity, do not fit easily within the rigid account and costcenter structure of a general ledger, and so the focus is lost. As a result,there is no direction or logical connection in the budgeting and reportingprocesses for budget holders to adapt their behavior to achieving strategicgoals. 28
  • Calendar Based: For most organizations, budgeting is an annual process thatfollows the strategic plan, and it is a process that just takes too long.Hackett Best Practices reports that a typical organization takes over fourmonths to complete a budget cycle. Organizations with an annual budgetmust try to predict events that are 16 months away, which is unrealisticand leads to the strategy gap. According to Hackett, in today‘s fast-pacedbusiness environment, planning should be treated as a continuous exercisein operational decision making, resource allocation, and performancemanagement. Yet nearly half of organizations treat planning and budgetingas a strictly fiscal and annual exercise that leaves them unprepared to dealwith sudden change. Similarly, Hackett found that 74 percent oforganizations wait until the end of the month to issue reports. Doing sodelays the opportunity to deal with important emerging trends, whichcould be vital to the effective implementation of strategy. Interestingly,most organizations have the data; it is their processes and tools that letthem down. What is required is a planning, budgeting, and reportingprocess that is triggered by change, not by the date on a calendar.Financially Focused: An organization‘s financial results are the outcome of itsstrategy implementation or lack of strategy implementation. Althoughsome financial measures, such as investments and expenses, will be used inimplementing a tactical plan, many of the measures will be nonfinancial. 29
  • Indeed, the long-term viability of an organization may wellrest on the success of nonfinancial measures such as product reliability,customer satisfaction, organizational learning, and the efficiency of theinternal processes. The adoption of methodologies like the BalancedScorecard can ensure that organizations achieve the correct balance ofmeasures that will be needed to achieve corporate objectives. The generalledger by itself will not be able to supply all the data required. As alreadymentioned, the chart of accounts is a transactional view of an organization.The reliance on this view cannot support the planning and monitoring ofstrategy and will lead to the strategy gap.Internally Focused: Consider an organization that sets and achieves a revenuebudget that reflects a growth of 10 percent year on year. Is thisachievement a good result? Is it a good result if the general ledger confirmsthat the goal was achieved while staying within the cost budget? What ifthe goal was built on the assumption that the market was due to grow at 5percent, when, if fact, it grew at 15 percent? In this case market share waslost rather than gained. In most organizations today, reports compare theperformance of the organization with the budget, not with competitors andthe market. Strategy is nearly always based on a combined internal andexternal view that includes market and competitor assumptions. To ensurethat strategy is being implemented, actual reporting needs to compareperformance by strategic initiative and to check that any externalassumptions made while planning still hold true. 30
  • Without this strategic external view, decisions will be based ona view of performance that is too narrowly focused, and the strategy gapwill develop.Lack of Realistic Forecasting: Although business conditions can change rapidly, manysurprises that affect organizational performance can be predicted usingavailable data and technologies. By predicting future performance fromplans based on the current and perceived business environment,contingencies drawn up in advance can be selected or corrections to theexisting plan can be made to avoid or exploit the impact of any variances.The ability to recognize and exploit changing business conditions is thedriving force behind rolling forecasts—which also deliver the benefit ofreducing or eliminating the annual budget process. According to HackettBest Practices research, however, only 23 percent of organizations makeuse of this proven best practice. When forecasting, many organizations once again focussolely on financial results, such as how much revenue will be generatedand what the associated costs will be. As with planning, effectiveforecasting requires modifying and developing plans to achieve strategicgoals. In some circumstances, such as when assumptions have changed,strategic goals may have to be reset. Forecasting involves two steps:1. Predicting the likely future performance based on current knowledge2. Evaluating or selecting alternative plans to change the predictedoutcome to predict future performance, the natural life cycle of anorganization‘s products and services should be taken into account. 31
  • This consideration must take place bottom up; that is, each product andservice must be analyzed individually. 32
  • Q. 2 (b) Select any firm from manufacturing sector; discuss the general environment and competitive environment of that firm.Answer: ENVIRONMENT Environment includes all the conditions, circumstances andinfluences surrounding and affecting the total organization or any of itspart.There are many forces in the environment which influence the working ofthe organizations.  Economic Environment  Legal Environment  Political Environment  Technological Environment  Sociological Environment  Cultural Environment  Competitive EnvironmentEconomic Environment:  Economic System:  National Income and its Distribution  Monetary Policy  Fiscal Policy  Natural Resources  Infrastructural Facilities 33
  •  Raw Materials and Supplies  Plant and Equipment  Financial Facilities  Manpower and ProductivityEconomic System:  Capitalistic, Mixed Economy, Socialistic Economy  Economic system puts certain restrictions over the functioning of the organizations.  ProtectionNational Income and its Distribution:  Determines the purchasing power of people  Demand for the products.Monetary Policy:  Financial facilities for the growth of industries.  Control and measures to generate employment.Fiscal Policy:  Tax Structure  Government ExpenditureNatural Resources:  Availability of natural resources – land, minerals, fuel etc.  Exploitation and use of natural resources. 34
  • Infrastructural Facilities:  Transportation, Communication, banking services, financial services, insurance and soon.  Government emphasis on the development of backward areas.Raw Materials and Supplies:  Price of Materials  Frequency of Materials  Regularity of supply  Terms and ConditionsPlant and Equipment:  Availability of Plant and Equipment.  Technological Development in the countryFinancial Facilities:  Sources of finance – share capital, banking and other financial institutions, unorganized capital markets.Manpower and Productivity:  Availability of factors of production.  Level of the productivity.POLITICAL-LEGAL ENVRIONMENT:  Provisions of various facilities.  Incentives protecting the market.  Roles in the development of the business.  Laws, regulations and court decisions. 35
  •  Political Stability – impact of changes in the form and structure of government administration.  Approaches of the government towards business.  Restrictions in importing technology, capital goods and raw materials.  Restriction on pricing and distribution of goods.TECHNOLOGICAL ENVIRONMENT:  Includes inventions and techniques  Designing, Producing and Distributing  Level of technological development in the current. 36
  • COMPETITIVE ENVIRONMENT OF MANUFACTURING FIRM Potential Development of Substitute Products Bargaining Rivalry Bargaining of Power of among Consumers SupplierS competing Potential energy of new competitorsThe General Industry Environment and Competitive Environment Through an integrated understanding of the external andinternal environments, firms gain the information they need to understandthe present and predict the future. 37
  • The general environment is composed of elements in thebroader society that influence an industry and the firms within it. Theseelements can be grouped into six environmental segments: demographic,economic, political/legal, social cultural, technological, and global. Firmscannot directly control the general environment‘s segments and elements.Accordingly, successful companies gather the types and amounts of dataand information that are required to understand each segment and itsimplications so that appropriate strategies can be selected and used. The industry environment is the set of factors—the threat of newentrants, suppliers, buyers, product substitutes, and the intensity of rivalryamong competitors—that directly influences a firm and its competitiveactions and responses. In total, the interactions among these five factorsdetermine an industry‘s profit potential. The challenge is to locate aposition within an industry where a firm can favorably influence thosefactors or where it can successfully defend against their influence. Thegreater a firm‘s capacity to favorably influence its industry environment,the greater is the likelihood that the firm will earn above-average returns. How companies gather and interpret information about theircompetitors is called competitor analysis. Understanding the firm‘scompetitor environment complements the insights provided by studyingthe general and industry environments. 38
  • In combination, the results of the three analyses that are used tounderstand the external environment influence the development of thefirm‘s strategic intent, strategic mission, and strategic actions. Analysis ofthe general environment is focused on the future; analysis of the industryenvironment is focused on understanding the factors and conditionsinfluencing a firm‘s profitability; and analysis of competitors are focusedon predicting the dynamics of competitors‘ actions, responses, andintentions. Although we discuss each analysis separately, performanceimproves when the firm integrates the insights gained analysis of thegeneral environment, the industry environment, and the competitorenvironment. Analysis of competition The third element of Strategic analysis is to look at thecompetitive environment - what your competitors are doing, where thenext technological developments are coming from and the generaldirections the market is moving.Competitive and environmental analysis A competitive and environmental analysis of your marketsshould include all the key influencing factors that affect the way in whichyou can compete. A competitive review is important for two reason. 39
  • Firstly, even if you know what the customers want and havethe resources to meet the customers demands, it may be that thecompetitive environment means that it is not worth pursuing particularparts of the market for a whole range of strategic reasons, such as the threata price war, channel conflict, or legal or ethical considerations. Secondly, you need to know if your competitors are doingthings better than you are, or more dangerously, whether they are lookingto change the basis of competition in the market, for instance by moving toa direct sales model, or by introducing some revolutionary new product ortechnology.The main types of competitive analysis from a strategic point of view are: "The Five Forces" Benchmarking and competitive evaluationBenchmarkingBenchmarking is used to ascertain how well you are doing against thecompetition. Are there areas that you can learn from the competition? Arethere ideas in markets outside your own that would be worth bringing intoyour market to give you a competitive advantage?Your competitors can also be a source for information about the generalmarket. Their advertising and marketing is telling you something about themessages and approaches that they think are applicable to your market. Ifthey have done their research, you can learn from their approaches. 40
  • One common issue that comes from looking at the competition is what doyou do about it? The options are: Ignore Fight AdoptIn practice, if there is merit in something new and you ignore it, it is likelyto bite you later. If you fight against it, you add to your costs potentiallyjust to save market share, rather than to win market share.Consequently often adoption of the competitions good ideas is the bestway forward (although perhaps after a little fighting to test whether theideas are sound). Microsofts Embrace and Extend and Intels "Only theParanoid Survive" are good examples of companies that use thecompetition to keep their products at the cutting edge.Often there can internal cultural issues that mean this can be difficult toaccept. But learning from the competition, doesnt mean following thecompetition. This approach, known as an "invest in your threats" strategy,can be an extremely effective way of keeping up with and ahead of themarket. 41
  • Competition among Organizations:Example: Coca-Cola and Pepsi• This leads to rivalry among organizations.• Demand for industry declines• Price cutting becomes common• Merger and Acquisitions are frequentPossible entry of new competitors:Identify potential new firms entering the market, to monitor theirstrategies, to counterattack as needed and to capitalize on existingstrengths and opportunities.Possible development of alternative products:  Identify new firms which can produce the substitute products in other industries.  Example: Plastic producers can get into production of disposal glass.Bargaining Power of Suppliers:Best Interest of both suppliers and producers to assist each other withreasonable prices, improved quality and development of new services, intime deliveries and reduced inventory cost, thus enhancing long termprofitability for all concerned.Bargaining Power of Consumers:Bargaining powers of consumers is also higher when the products beingpurchased are standard or undifferentiated. 42
  • Q. 3 Suppose you are running a large scale business organization, how will you use the technology to leverage human capital and knowledge?Answer: The Role of Technology in a Nation From the beginning of time, man has strived to improve his wayand quality of life. The caveman discovered how to make and use tools,developed a logical sequence for activities, and evolved processes thatadded value to his life. The totality of the use and application of hisknowledge, skills, tools, and materials constitutes what we today describeas ―Technology.‖ If natural instinct directs us and compels the applicationof technology for the well-being of man, why is it that all humankind hasnot exploited this in equal capacity? Technology plays a fundamental role in wealth creation,improvement of the quality of life, real economic growth, andtransformation in any society. For example, the United Kingdom andFrance benefited tremendously from the industrial revolution in the 19thcentury, and the United States emerged from an agrarian economy into anindustrial superpower in the 20th century. Taiwan and Korea becameindustrialized countries by exploiting advances in silicon microelectronicsfrom the early 1960s. Most recently, China and India have emerged asindustrial leaders in manufacturing and information technology,respectively. All of these countries invested quite heavily in people andfactories, and their successes were based on carefully designed plans and 43
  • strategies. Unfortunately, in many, if not all, of the no developed (or ―yet todevelop‖) countries, technology is viewed as a consumable item, notsomething that can be produced or created. Technology is the primary engine of economic growth andprovides the key to unlocking any country‘s potential. Hence, countriesthat want to develop must invest significantly in science and technology.This is achieved by developing the talent, the human capacity required tocompete in a globally competitive world. Technology Role in Pakistan Technology is a major driver of productivity, as it enablestransformation of business processes and applications and improvesorganizational effectiveness. Innovation, which often leads to the creationof new products and services, the improvement of existing offerings or thecreation of new business models, is also a key contributor to productivitygrowth. Technology and innovation also reinforce each other, thusenabling further positive impact on productivity. Currently, theproductivity improvements that can be derived from technology andinnovation are not fully leveraged by either Pakistani companies or thePakistani government. To drive productivity growth, Pakistani companies need toimprove their technology adoption and use, as well as their innovationperformance. Use of the Internet and online public services by Pakistanbusinesses lags that of global leaders, and companies have not yet tapped 44
  • the potential of technology to improve business processes. One of thereasons for the low levels of technology use is the inability of Pakistanicompanies to absorb new technology, as well as relatively weak technicalskills. Companies also lag global leaders in innovation inputs and outputsthe determinants of overall innovation performance. Several factors under the government‘s control, includinginadequate technological infrastructure and a weak regulatoryenvironment, are restricting the potential for technology and innovation todrive Pakistan‘s productivity growth. Other major barriersto improving innovation performance include lack of appropriateskills in the workforce, weak intellectual property rights laws andenforcement, and low levels of collaboration between public and privatesectors. Technology is a key driver of productivity growth, as it enablestransformation of business processes and applications and improvesorganizational effectiveness. Technology also enables improvedmanagement of internal or outsourced expertise by facilitating improvedcommunications. Innovation, on the other hand, can lead to the creation ofnew products and services, which facilitates increased market share andgenerates growth. Innovations aimed at improving existing and creatingnew business models also help generate productivity growth. 45
  • A Climate that Promotes Technological Innovation Should Be Maintained The most-important role of government in technologydevelopment and adoption is maintaining an environment conducive toprivate-sector innovation and investment. Many policies affect thatenvironment, including policies on taxes, trade, investment, patents,product liability, environmental and consumer protection, internationalarms control, and human resources. Those policies have multiple andsometimes competing aims. By explicitly recognizing the effects of publicpolicies on technology development and adoption, government couldbetter integrate its pursuit of technological, economic, and social objectives. The governments economic and regulatory policies have anespecially broad influence on technology development and adoption. Forexample, government policies help to determine levels of investment in theeconomy, which in turn drives productivity, economic growth, and jobcreation. Public and private investment in research and development leadsto new products and processes that can spur productivity and investmentin new facilities and equipment gives companies an opportunity toincorporate more-productive technologies into their operations.Enhancing Technological Strength Establishing a plan to develop industry sectors and employment opportunities for sustained growth Developing suppliers capable of expanding outside of the oil and gas industry 46
  • Monitoring and encouraging competitionTechnology can leverage human capital and knowledge  Within the organization  With customers  With suppliers Technology can leverage human capital and knowledge Within the organization Organizations fulfill their purposes and maintain theirraisons by what they know and how well they harness their knowledge.This fact should be a compelling reason for organizational governance andmanagement to nurture most diligently the people and the systems thatcreate, preserve, disseminate, renew and deploy knowledge. Is this so?, orare organizations squandering their supreme resource: the power and theproduct of the human mind? Is the advent of the knowledge economythrusting the knowledge factor into the cores of corporate strategies? In a company, as in an economy, physical and mental orintellectual capital generates all the economic wealth and value. Intellectualcapital is made up of human and knowledge capital. Human capitalcomprises individual talents and knowledge that is acquired througheducation, training, experience, and cognition. Knowledge capital is thedocumented knowledge that is available in such forms as research papers, 47
  • reports, books, articles, manuscripts, patents and software. Knowledgecapital consists of the artifacts of the human mind that are also storedoutside the minds of their authors, and can therefore be available towhoever seeks them. The effective interaction and integration of the twokinds of intellectual capital is essential for maximizing its productivity. Clearly intellectual capital is the fundamental input to allwealth generating processes. Without knowledge natural resources couldnot be developed, and most of the value of manufactured goods consists intheir knowledge contents. So physical assets owe most of their value tointellectual capital, and yet most companies are not organized to benefitfully from leveraging intellectual capital. The challenges to capitalizing onthe knowledge advantage include: integration of intellectual capital withstrategy; and monetary evaluation of intellectual capital. • Sharing knowledge and information  Conserves resources  Develops products and services  Creates new opportunities • Using networks to share information and develop products and services  E-mail  Electronic or Virtual teams 48
  • • Enhance speed and effectiveness with which products are developed • Can be applied to new business venture• Codifying knowledge for competitive advantage  Tacit knowledge • Personal experience • Shared only with the consent and participation of the individual  Explicit (codified) knowledge • Can be documented • Can be widely distributed • Can be easily replicated • Can be reused many times at low cost 49
  • Human Capital The role of the human capital in today‘s organization recently hasbeen going into a revolutionary phase. As the workplace moves to a serviceand information economy, savvy organizations are increasingly becomingaware that acquiring and sustaining their human capital is very critical fortheir survival. At this same time the workforce is in a state of continuousevolution. The technological revolution, the influence of the media and theimpact of globalization have resulted in dramatic social, political, andeconomic changes world-wide. New demographic patterns are takingshape in the workplace. Organizations need to understand that to remaincompetitive, they need to know how to obtain and retain talent and how toinvest in and manage their human capital. They also need to know how touse technology in optimizing their people‘s knowledge and skills. Leveraging human capital Technology has never been a limiting factor in e-business.Software engineers and Web developers have an inexhaustible capacity toinvent new ways of building relationships and consummating transactionson the Internet. Bots, natural-language search engines, collaborativefiltering, multiple flavors of Extensible Markup Language (XML) is a setof rules for encoding documents in machine-readable form, the tools of theglobal e-marketplace continue to evolve at an astonishing pace. 50
  • E-Mail and E-Business Growth in the cyber economy is a shortage of human capitalpeople who either directly or indirectly wield those tools to deliver goodsand services over the Web. "In order to succeed in (e-business) you needgreat people making great decisions every day, ―You cant automate awaythose processes." In an environment in which strategic advantage stems frominnovation, speed to market and finely honed customer service, companiesare rethinking the way they leverage human capital--flattening hierarchies,eliminating functional barriers and rewarding creative risk takers.Successful e-businesses have caught on to the Saturn model. By bringingtogether people from different departments to develop a new product, orfigure out how to market it on the Web, they can give people from differentareas a holistic understanding of the project. By talking to sales, IT gets aclearer picture of what customers want. From marketing, a Web designergains insight into how a new technology or service will be positioned withcurrent offerings. Exchanging diverse ideas and perspectives via e-mail,instant messaging or in actual meetings speeds up the creative process andyields solutions that never would have come to light in an old-style,quarterly product council. 51
  • Electronic or Virtual teams To flourish on virtual teams, workers need a broad array ofskills and a certain fluidity of thought, the ability to solve problems on thefly and prioritize dozens of daily decisions and tasks. A willingness toaccept risk and ambiguity are valuable traits in a business environmentthat seems to reinvent itself every six months. Those qualities arent just indemand at the executive and middle management levels; an ability to thinkcreatively and roll with the punches also comes in handy for the rank andfile. Creating a sustainable culture that doesnt chew up people and spitthem out is another aspect of e-biz HR that more and more companies aretaking seriously. Whats the point of bringing in talented people, orteaching them XML and Web marketing techniques, if they quickly moveon? The value of IT alignment Although all firms have access to technological resources, thedifferences in what organizations gain from using information technologydepend on the management of technology. Performing IT alignment auditson a regular basis is essential, and provides the key to achievingcompetitive and organizational advantage. Regular audits give executivesa better understanding of their business‘ technological capabilities andenable them to better identify technology-driven business innovation.Executives and business owners will be more up to make smart 52
  • investments in technology if they ask themselves the following keyquestions: Can IT help me reach new markets? Can IT reduce barriers to entry in my business? Can IT make my business processes faster or smarter or both? How might IT impact who performs a process and where it‘s done? Create New Opportunities ―There are all kinds of ways technology can enhance a businessmodel and create opportunities,‖ Technological advancements can allowexisting businesses to reach existing customers in new ways, reach newcustomers, increase customer loyalty via value-added services, and usedata to create new sales opportunities through cross-selling and the like. For example, technology allows airlines to send customers amessage—via email, text or voice mail—to notify them if a flight has beendelayed or cancelled. These value-added services help create customerloyalty. When an existing customer logs onto Amazon.com, the retaileruses data collected from the user‘s past purchases to greet the customerwith items ―recommended‖ for him or her. Amazon also uses technologyto exploit cross-selling opportunities. If a customer researches a certainbook, Amazon provides details and reviews as well as links to similarbooks. 53
  • Let Technology Propel Your Business Technology can also refine business processes and makebusiness models more efficient. For instance, Cisco Systems, Inc. is a topprovider of IP-related networking equipment, but Cisco doesn‘t operate asingle manufacturing plant. Cisco relies on a handful of contractmanufacturers for the bulk of its production. A single enterprise extranetconnects manufacturers and distributors. By creating electronic linksinstead of physical ones, Cisco is able to reduce the number of stepsnecessary to obtain and fulfill customer orders. Technology can also improve the ability of companies tomanage process knowledge. Cisco provides the data collected by itscustomer service department to equipment designers and manufacturers.Through this process, Cisco‘s been able to trouble shoot, identify designand marketing flaws and correct them. 54
  • Human Capital Assessments Human capital is frequently the source of an organizations mostimportant strengths—innovation, customer satisfaction, quality, andproductivity. By evaluating and then focusing on meaningful leveragepoints, we can develop an effective and efficient human capital strategythat improves top- and bottom-line performance.How we do it We speed this process by using a web-administered humancapital diagnostic to assess opportunities. These diagnostic and other keyfactors are used as inputs in an economic model that evaluates the financialbenefits of potential improvements. Finally, we prepare specific, strategicaction steps that create additional company value. 55
  • Knowledge and Information Sharing Solutions That Make a Difference The key to managing your knowledge, information and data resources is getting the right knowledge, information or data to the right person at the right time. It almost sounds easy when you spell it out that way. But we all know that achieving this noble goal is one of the biggest challenges facing organizations today. Thats why some organizations spend untold thousands, millions even, implementing ERP products or CRM products. All in the effort to solve knowledge, information and data management issues. What we do have are intuitive, easy to implement solutions that can make a difference in your day-to-day workflow. Intuitive means you and your staff do not need a lot of training to get up and running on our knowledge and information sharing solutions. It also means you dont have to fight with it to get it to do what you want it to do. Easy to implement means anyone who can install and configure an office suite can install our solutions. And finally, the most important measure, making a difference means you get to spend more time achieving your goals rather than trying to figure out how to improve your organizations ability to share knowledge and information. Track information on key customers, suppliers and partners? Be easily shared with everyone at your organization, both office and field staff? Easily group people into one or more mailing lists? Send broadcast e-mail and fax messages? 56
  • Print mailing labels and envelopes with a few clicks?Integrate with your e-mail system so you have one location forname, address, phone and e-mail?Easily show the relationship between companies, theirlocations, and the people who work there?Let you have your own list of favorite contacts to give you yourown private address book within the same shared addressbook?Pull the entire address book or just your favorite contacts toyour handheld device?Track who has made recent changes to each address bookentry?New employees can immediately get up to speed on customerstatus, project status, whatever status.When someone leaves your organization, all of the businessinformation he accumulated is not locked in his mail file.Smaller e-mail files, no archive headaches.Reduced storage, back-up and other management costsImproved knowledge and information sharing and retentionfor your organization.Using IT as an enabler to deliver services at lower cost andhigher quality.Adding value to the business in strategic, IT-enabled talentmanagement that results in an efficient and effective executionof processes. 57
  • Harvesting the benefits of implemented technology byapplying emerging technologies.Accelerating learning to keep skills honed and relevant.Enabling collaboration and intelligent distribution of work tohelp ensure that HR processes run smoothly and use the bestavailable skills.Providing employees with better service from the HRorganization to keep them motivated. 58
  • Q. 4 For any government organization in Pakistan, what will be the challenges and implications for the strategy development of Human Resource Management? Discuss in detail.Answer:HRM Strategy An HRM strategy pertains to the means as to how toimplement the specific functions of HRM. An organization‘s HR functionmay possess recruitment and selection policies, disciplinary procedures,reward/recognition policies, an HR plan, or learning and developmentpolicies; however all of these functional areas of HRM need to be alignedand correlated, in order to correspond with the overall business strategy.An HRM strategy thus is an overall plan, concerning the implementation ofspecific HRM functional areas.An HRM strategy typically consists of the following factors: "Best fit" and "best practice" - meaning that there is correlation between the HRM strategy and the overall corporate strategy. As HRM as a field seeks to manage human resources in order to achieve properly organizational goals, an organization‘s HRM strategy seeks to accomplish such management by applying a firms personnel needs with the goals/objectives of the organization. As an example, a firm selling cars could have a corporate strategy of increasing car sales by 10% over a five year period. Accordingly, the HRM strategy 59
  • would seek to facilitate how exactly to manage personnel in order to achieve the 10% figure. Specific HRM functions, such as recruitment and selection, reward/recognition, an HR plan, or learning and development policies, would be tailored to achieve the corporate objectives. Close co-operation (at least in theory) between HR and the top/senior management, in the development of the corporate strategy. Theoretically, a senior HR representative should be present when an organization‘s corporate objectives are devised. This is so, since it is a firms personnel who actually construct a good, or provide a service. The personnels proper management is vital in the firm being successful, or even existing as a going concern. Thus, HR can be seen as one of the critical departments within the functional area of an organization. Continual monitoring of the strategy, via employee feedback, surveys, etc. The implementation of an HR strategy is not alwaysrequired, and may depend on a number of factors, namely the size of thefirm, the organizational culture within the firm or the industry that the firmoperates in and also the people in the firm. 60
  • An HRM strategy can be divided, in general, into two facets the people strategy and the HR functional strategy. The people strategy pertains to the point listed in the first paragraph, namely the careful correlation of HRM policies/actions to attain the goals laid down in the corporate strategy. The HR functional strategy relates to the policies employed within the HR functional area itself, regarding the management of persons internal to it, to ensure its own departmental goals are met. Importance of HRM Strategy for HRM Employees i. The HRM Strategy is the main document describing the vision, mission and goals of the HRM Function in the organization. The HRM Strategy describes the final and desired state of the HRM Function.ii. The HRM Employees use the HRM Strategy as the basis for the goal setting process within the HRM Function to navigate their own performance the right direction.iii. The HRM Strategy has to be a public document freely available to all the HRM Employees to let them identify their own role in the strategy. The HRM Employees need a chance to discuss the HRM Strategy to know exactly the content. The understanding to the content of the HRM Strategy can help them to unblock any fear and to become more productive.iv. The new HRM Strategy should not make the employees to believe they will be changed for the new employees who fit the new strategy better. The HRM Employees need to identify their role and their gaps against 61
  • the new HRM Strategy to know how to cross the gaps in their current skills and competencies.v. The HRM Strategy provides the employees with the possibility to plan their own goals in the long term point of view and it can bring better understanding to all the initiatives of the HRM Function. Developing a HRM strategy Faced with rapid change organizations need to develop a more focused and coherent approach to managing people. In just the same way a business requires a marketing or information technology strategy it also requires a human resource or people strategy. In developing such a strategy two critical questions must be addressed. What kinds of people do you need to manage and run your business to meet your strategic business objectives? What people programs and initiatives must be designed and implemented to attract, develop and retain staff to compete effectively? In order to answer these questions four key dimensions of an organization must be addressed. These are: Culture: the beliefs, values, norms and management style of the organization 62
  • Organization: the structure, job roles and reporting lines of the organization People: the skill levels, staff potential and management capability Human resources systems: the people focused mechanisms which deliver the strategy - employee selection, communications, training, rewards, career development, etc. Frequently in managing the people element of their businesssenior managers will only focus on one or two dimensions and neglect todeal with the others. Typically, companies reorganize their structures tofree managers from bureaucracy and drive for more entrepreneurial flairbut then fail to adjust their training or reward systems. When the desired entrepreneurial behavior does not emergemanagers frequently look confused at the apparent failure of the changesto deliver results. The fact is that seldom can you focus on only one area.What is required is a strategic perspective aimed at identifying therelationship between all four dimensions. If you require an organization which really values qualityand service you not only have to retrain staff, you must also review theorganization, reward, and appraisal and communications systems. The pay and reward system is a classic problem in this area.Frequently organizations have payment systems which are designedaround the volume of output produced. If you then seek to develop acompany which emphasizes the products quality you must change the pay 63
  • systems. Otherwise you have a contradiction between what the chiefexecutive is saying about quality and what your payment system isencouraging staff to do.There are seven steps to developing a human resource strategy and theactive involvement of senior line managers should be sought throughoutthe approach.Steps in developing HRM strategyStep 1: Get the big pictureUnderstand your business strategy. Highlight the key driving forces of your business. What are they? e.g. technology, distribution, competition, the markets. What are the implications of the driving forces for the people side of your business? What is the fundamental people contribution to bottom line business performance?Step 2: Develop a Mission Statement or Statement of IntentThat relates to the people side of the business. Do not be put off bynegative reactions to the words or references to idealistic statements - it isthe actual process of thinking through the issues in a formal and explicitmanner that is important. What do your people contribute? 64
  • Step 3: Conduct a SWOT analysis of the organizationFocus on the internal strengths and weaknesses of the people side of thebusiness. Consider the current skill and capability issues. Vigorously research the external business and marketenvironment. High light the opportunities and threats relating to thepeople side of the business. What impact will/ might they have on business performance? Consider skill shortages? The impact of new technology on staffing levels? From this analysis you then need to review the capability ofyour personnel department. Complete a SWOT analysis of the department- consider in detail the departments current areas of operation, the servicelevels and competences of your personnel staff.Step 4: Conduct a detailed human resources analysisConcentrate on the organizations COPS (culture, organization, people, andHR systems) Consider: Where you are now? Where do you want to be? What gaps exists between the reality of where you are now and where you want to be? 65
  • Exhaust your analysis of the four dimensions.Step 5: Determine critical people issuesGo back to the business strategy and examine it against your SWOT andCOPS Analysis Identify the critical people issues namely those people issues that you must address. Those which have a key impact on the delivery of your business strategy. Prioritize the critical people issues. What will happen if you fail to address them?Remember you are trying to identify where you should be focusing yourefforts and resources.Step 6: Develop consequences and solutions For each critical issue highlight the options for managerial actiongenerate, elaborate and create - dont go for the obvious. This is animportant step as frequently people jump for the known rather thanchallenge existing assumptions about the way things have been done in thepast. Think about the consequences of taking various courses of action.Consider the mix of HR systems needed to address the issues. Do you needto improve communications, training or pay?What are the implications for the business and the personnel function? 66
  • Once you have worked through the process it should then be possible totranslate the action plan into broad objectives. These will need to be brokendown into the specialist HR Systems areas of: Employee training and development Management development Organization development Performance appraisal Employee reward Employee selection and recruitment Manpower planning CommunicationDevelop your action plan around the critical issues. Set targets and datesfor the accomplishment of the key objectives.Step 7: Implementation and evaluation of the action plans The ultimate purpose of developing a human resource strategyis to ensure that the objectives set are mutually supportive so that thereward and payment systems are integrated with employee training andcareer development plans. There is very little value or benefit in training people only tothen frustrate them through a failure to provide ample career anddevelopment opportunities. 67
  • Strategic human resource management is designed to helpcompanies best meet the needs of their employees while promotingcompany goals. Human resource management deals with any aspects of abusiness that affects employees, such as hiring and firing, pay, benefits,training, and administration. Human resources may also provide workincentives, safety procedure information, and sick or vacation days.Strategic human resource management is the proactive management ofpeople. It requires thinking ahead, and planning ways for a company tobetter meet the needs of its employees, and for the employees to bettermeet the needs of the company. This can affect the way things are done at abusiness site, improving everything from hiring practices and employeetraining programs to assessment techniques and discipline.HRM Strategic Challenges The HRM Function has some strategic challenges, whichwill affect the whole organization in the future. The strategic challengeswill change the organization of the HRM Function and its role in theorganization. The current role of the HRM Function is about providingservices to the organization and the managers are a clear clients of theHRM Processes. The HRM Function usually do not provide challengingquestions and initiatives to the organization and the business leaders do 68
  • not have to worry about the HRM Function as the salaries are paidcorrectly at every pay date defined by the organization.The main HRM Strategic Challenges can be defined in four main areas: Leadership Development; Management Development; Globalization; Outsourcing.Leadership Development The Leadership Development is one of the biggest HRMChallenges. The leadership development is the only way to secure theorganization for the future. The supply of the leaders is very limited andthe organization has to focus on the growth of the potential available insidethe organization. The HRM Function has to take the responsibility for theinitiatives to identify and grow the potential inside the organization and tosecure the best potential to stay in the organization. The leadershipdevelopment initiatives are extremely costly, but the organization has torecognize the need to invest in such initiatives. This is a major HRMChallenge.Management Development The line management is another HRM Challenge. The linemanagement is the main user and client of the HRM Value Addedprocesses and they have to be able to use the processes correctly. The HRM 69
  • Function can be seen as the enemy, but the HRM Challenge is to developand train the line management in the daily usage of the value added HRMProcesses to make the organization more efficient.Globalization The globalization is another HRM Challenge. The HRMFunction has to make its policies, procedures and processes to work on theglobal level. Currently, most of the HRM Policies is focused on the concretecountry, but the employees have to start to move from the country toanother country and the HRM Processes have to be able to support such aneed in the organization. The globalization has a huge impact on the HRMFunction and then it is usually not ready to take more responsibility in themovement of the workforce around the Globe.Outsourcing The outsourcing is the main issue for the HRM Function. TheHRM Function has to be able to outsource its non-core services for theorganization and it has to be able to keep the service level for theorganization. The outsourcing HRM Challenge is pretty huge as it requestsa lot of standardization and practice from the HRM Function.Changes That Challenge Managers of Human ResourcesIn the preceding section we briefly mentioned some of the environmentalchanges that may precipitate changes in an HR program. Increasingly, HRmanagers are involved in issues management directed toward early 70
  • identification of trends that may require adjustments in HR policies and procedures. SHRM has identified five basic areas where change is rapidly occurring. These five areas are shown below. CURRENT ISSUES IN HRM Employer/Employee RightsThis is clearly an important and growing area of debate and concern. Tosome degree, it reflects the shift in employer/employee negotiations from thebargaining table to the courtroom, as organizations and individuals attemptto define rights, obligations, and responsibilities. Among the many specificissues covered in this broad area are Job as an entitlement Plant closing notification Employment at will Right to know Privacy (testing) Comparable worth Whistle-blowing Right to manager Mandated benefits AIDS Smoking 71
  • Work and Family RelationsThere is a new and important perception that the individual at work is not―detached‖ from family concerns and responsibilities. Due, in part, to therapid increase of women in the workplace, as well as a growing interest inand concern with the family, there is increasing demand for recognitionand support of family-related employee concerns. Among the issues in thisarea are Day care Parental leave Child care leave Cafeteria plans Alternative work plans Mandated benefits Elder care 72
  • Education/Training/RetrainingAs organizations trim personnel and gear up for the tough competitionwithin the global economy, the skills and competence of the available poolof employees are becoming a pivotal issue. This issue spans the range ofskill development from the earliest stages of the education experience tothe challenges of retraining an aging workforce. If ―human resources areour most important asset,‖ it is here that the investments must be made ifthat asset is to be productive. Among the key issues in this area are Literacy Dropout prevention Employee education/training Retraining Management development Industry obsolescence Plant closings 73
  • Changing DemographicsThe next 20 years will bring a constant aging of the workforce. This hasmajor implications for all aspects of human resource management as italters traditional experience and expectations regarding the labor pool.Among the issues in this area are Shrinking pool of entry-level Social Security workers Motivation Retirement health benefits Elder care funding Pension fund liabilities Increasing number of ―nonpermanent/Contract‖ employees 74
  • Productivity/CompetitivenessThe calls for increased productivity, quality, and competitiveness will onlygrow in intensity over the coming years. A persistent trade deficit andcontinued successes in the global market of our international competitorswill serve to intensify the quest for a more productive workforce. Amongthe issues in this area are Productivity improvement Quality programs and Worker participation measurement Foreign competition Incentive/performance pay Mergers Globalization Downsizing 75
  • Q. 5(a) How an international organization develops its different strategies? Explain the factors affecting international strategies.Answer: International strategy formulation requires the firm to deal notonly with the normal strategic considerations of markets, technology andcompetition, but also with national sovereignty and international politicalrelationships. There is considerable potential for conflict between the firmand the nation because firms want to develop strategies and allocateresources rationally to maximize profits while nations want maximumcontributions to their development and future prosperity. The result can bemutual advantage through cooperation, or intense conflict. To minimizeconflict, strategies must be flexible enough to adapt to environments ofcountries that are diverse. In international business, as in domestic business, theappropriate strategy for a firm is largely determined by the environmentin which the firm must compete. This environment is not static and,indeed, one of the factors causing change in the operating environment isthe strategies pursued by international firmsStrategy: Definition and purposeStrategy may be defined as the pattern or plan that integrates anorganization‘s major goals, policies, and action sequences into a cohesivewhole. A global strategy, then, is a unified plan which ties all parts of 76
  • together so that it can achieve its objectives, subject to environmentalconstraints and its own resource capabilities.The management of strategy is a process - the strategic managementprocess - in which the major elements are: diagnosis of the organization‘s internal and external environments, also known as a SWOT ( Strengths, Weaknesses, Opportunities, Threats) analysis, which is explained further in a reading strategy formulation strategy implementation; and evaluation and control, which incorporates a feedback loopThe strategic planning process which underpins the strategic managementprocess is. You are not expected to remember, but it is important tounderstand the essence of what it tells you and the types of issues involvedin planning for international business. You will also see in the top right-hand corner the term strategic intent. This is analogous to the termmission, although in a course devoted wholly to strategic management wemight differentiate between the two terms. They are almost, but notexactly, the same thing.The dual purpose of any firm is to survive and to make a profit. The firmmakes a profit by giving consumers goods or services which they value.The firm therefore is involved in some process of value creation. Thisprocess may be considered as a value chain in which each link adds value 77
  • to the primary material. For example, imagine the activities in a bakerymaking meat pies: The pastry maker adds value to the raw ingredients (for example flour, salt, and sugar). The pie filler adds value by inserting the meat (or fruit) mince. The baker adds value by cooking the pie. The counter attendant adds value by assisting the customer to purchase the pie.The firms value chain consists of two sets of activities: primary activities : essentially production and marketing such as those illustrated in the pie-making example above secondary activities : essentially those activities which provide support facilities to the production and marketing peopleWhat is Strategic Management?Strategic ManagementThe set of decisions and actions used to formulate and implementstrategies that will provide a competitively superior fit between theorganization and its environment so as to achieve organizationalgoals. 78
  • Grand Strategy The general plan of major action by which an organizationintends to achieve its long-term goals. Three general categories:Growth – can be promoted internally by investing in expansion orexternally by acquiring additional business divisions.Stability (pause strategy) – that the organization wants to remain thesame size or grow slowly and in a controlled fashion.Retrenchment – that the organization goes through period of forceddecline by either shrinking current business units or selling off orliquidating entire business.Global Strategy a separate grand strategy as the focus of global business.Three global strategies:Globalization – the standardization of product design andadvertising strategies throughout the world. 1. Multidomestic strategy – the modification of product design and advertising strategies to suit the specific needs of individual countries. 2. Transnational strategy – a strategy that combines global coordination to attain efficiency with flexibility to meet specific needs in various countries. 3. Purpose of Strategy 4. Choosing how the organization will be different. 79
  • What Are International Organizations? In general international organizations are based on multilateraltreaties between at least two sovereign nation-states. The formation of aninitially fairly loose bond among the participants is generally fortified bythe development of more or less stringent institutional structures andorgans to pursue certain more or less clearly defined common aims in theinternational arena. IOs can either have a global or a regional character,with the latter in general displaying a more centralized structure due to thelimited number of regional state actors available. While many IOs aresingle issue organizations, others focus their attention on a multitude ofissues. IOs can either be open to new members or consist of a closedsystem. On occasion IOs are established for certain duration as specified intheir respective charters, but more often than not no time restriction isapplied.Levels of Strategy a. Corporate-Level Strategy 1. The level of strategy concerned with the question, ―What business are we in?‖ . Pertains to the organization as a whole and the combination of business units and product lines that make it up. 80
  • b. Business-Level Strategy 1. The level of strategy concerned with the question, ―How do we compete?‖ . Pertains to each business unit or product line within the organization.c. Functional-Level Strategy 1. The level of strategy concerned with the question, ―How do we support the business- level strategy?‖ . Pertains to all of the organization‘s major departments. 81
  • Strategy Formulation versus Implementation1. Strategy Formulation  The stage of strategic management that involves the planning and decision making that lead to the establishment of the organization‘s goals and of a specific strategic plan.2. Strategy Implementation  The stage of strategic management that involves the use of managerial and organizational tools to direct resources toward achieving strategic outcomes 2. S W O T Situation Analysis of the strengths, weaknesses, opportunities, and threats (SWOT) that affect organizational performance.  Strengths  Positive internal characteristics that the organization can exploit to achieve its strategic performance goals.  Weaknesses  Internal characteristics that might inhibit or restrict the organization‘s performance.  Opportunities  Characteristics of the external environment that have the potential to 82
  • help the organization achieve or exceed its strategic goals.  Threats  Characteristics of the external environment that may prevent the organization from achieving its strategic goals.Formulating Corporate-Level StrategyPortfolio Strategy A type of corporate-level strategy that pertains to theorganization‘s mix of SBUs and product lines that fit together in such away as to provide the corporation with synergy and competitiveadvantage.Strategic Business Unit (SBU) A division of the organization thathas a unique business mission, product line, competitors, andmarkets relative to other SBUs in the same corporation.The BCG Matrix A concept developed by the Boston Consulting Groupthat evaluates SBUs with respect to the dimension of business growth rateand market share. 83
  • Formulating Business-Level Strategy 1. It is a strategy formulation within the strategic business unit in which the concern is how to compete. 2. The same three generic strategies (growth, stability, and retrenchment) apply at the business level, but they are accomplished through competitive actions rather than the acquisition or divestment of business divisions. 3. Porter‘s Five Competitive Forces Rivalry among Competitors Threat of Substitute Products Potential New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Internet tends to increase bargaining power of suppliers Internet reduces barriers to entry Internet blurs differences among competitors Internet creates new substitution threats Internet shifts greater power to end consumersCompetitive Strategies 1. Differentiation a type of competitive strategy with which the organization seeks to distinguish its products or services from competitors. 2. Cost Leadership a type of competitive strategy with which the organization aggressively seeks efficient facilities, cuts costs, and employs tight cost controls to be more efficient than competitors. 84
  • 3. Focus A type of competitive strategy that emphasizes concentration on a specific regional market or buyer group Opportunities and Outcomes of International Strategy 85
  • Advantages of International Business Strategy:The world is becoming one marketplace of inter-dependent people andany firm which concentrates solely on a single domestic market willprobably fail or have a stunted growth pattern. There is thus a logical basisfor businesses to expand their operations internationally, and we can listthree basic reasons for firms going international: 1. To increase sales and profits, expand market outlets and exploit growth opportunities. Overseas sales can absorb extra capacity and reduce unit costs. They can also spread economic risk over a wide range of markets. 86
  • 2. To gain competitive advantages, can find low-cost production facilities close to raw materials and/or cheap labor. They can widen their channels of distribution and access new technology through joint ventures. 3. To secure raw material resources, MNEs can engage in worldwide exploration for, and the processing, transportation and marketing of, raw materials.DisadvantagesThere are also some disadvantages to international expansion, MNEs face amultiplicity of political, economic, legal, social and cultural environments. 1. There are complex interactions between a MNE and its host countries because of national sovereignties, widely disparate economic and social conditions, and other factors. 2. Geographical distance, cultural and national differences, variations in business practices, and other differences make communication difficult between the MNE and its subsidiaries. 3. Economic, marketing and other information required for strategic planning varies in availability, depth and reliability between countries. 4. Differences in industrial structure and business practices make analysis of future competition difficult to undertake. 5. Regional economic integration and the activities of institutions such as World Bank and GATT may confront the MNE. 87
  • To add further depth to this section, work through the following readingand add to the list of reasons why organizations go international.The advantages and disadvantages of going international have directrelevance to five specific issues dealt with under the two headingsProfiting from global expansion and Pressures for cost reductions andlocal responsiveness . We will discuss each of these five issues Generic strategies Firms may adopt one, two or all three of the following strategies: Cost leadership: to supply a product or service at lowest feasible cost to as many customers as possible Differentiation: to supply a product or service which customers will prefer above all others because it provides something they value Focus: to find a niche in the market and focus on the requirements of this niche in the hope of dominating it Within each of these three generic strategies firms have the following strategic options:1. Concentration (on a single product line)2. Horizontal integration (to gain ownership or control of competitors)3. Vertical integration (to reduce dependence on suppliers or distributors)4. Diversification (to broaden the product line) 88
  • 5. Joint ventures (to spread risk or bring about synergy)6. Retrenchment (to reduce the scale of activities)7. Divestiture (to remove sub-units which do not fit the organization)8. Liquidation (to get rid of sub-units which are unprofitable)9. Innovation (to gain market leadership by use of the product life-cycle)10.Restructuring (to concentrate on products or sub-units with high potential).You should keep all of these possibilities in mind when you read about thefour strategies described in your textbook. All of the options listed abovecan be employed within the four strategies summarized below. 89
  • International strategyThe firm develops a product or service in the home country and thenproduces and markets that product or service in host countries.Advantages: Core competencies are exported to gain cost advantages through lower labor and transportation costs. Limited local responsiveness.Disadvantages: Limited local responsiveness. Limited flexibility because of limited experience and location economies.Examples: Computers Foods PharmaceuticalsMulti-domestic strategyThe firm establishes a complete set of value creation activities in the hostcountries.Advantages: Confers almost total local responsiveness on the products / services.Disadvantages: Limited transfer of core competencies. Limited experience and location economies. Tends to produce a form of local autonomy 90
  • which makes the local unit unresponsive to corporate headquarters. Examples: Older MNEs of European origin. Global strategy: The firm produces in one or a few locations a standardized product for sale in all markets. Advantages: Local economies. Scale economies. Disadvantage Unresponsive to local demand. Examples: Electronic goods such as TV and VCR. Motor vehicles.Transnational strategyThe firm seeks to combine the benefits of global-scale efficiencies with thebenefits of local responsiveness. Interchange still occurs between the homebase and foreign subsidiary and between foreign subsidiaries - a processknown as global learning.Advantages: Core competencies exchangeable. Experience and location economies. Locally responsive.Disadvantages:Difficult to implement. The term transnational may be used differently 91
  • from person to person. There is no universally agreed definition.Examples: Shell, Unilever, Caterpillar. No strategy of the four mentioned is likely to provide the perfectresponse to the many variables which confront an MNE. However, the firmmust search for the best compromise. Turn now to your textbook and thentake some time to work through the placement of each strategy Anapplication of international strategy decisions for the global automotiveindustry is also included in the readingsSTRATEGY IN THE GLOBAL ENVIRONMENT: Globalization was the buzzword of the 1990s, and in the twentyfirst century, there is no evidence that globalization will diminish.Essentially, globalization refers to growth of trade and investment,accompanied by the growth in international businesses, and the integrationof economies around the world. According to Punnett (2004) theglobalization concept is based on a number of relatively simple premises: Technological developments have increased the ease and speed of international communication and travel. Increased communication and travel have made the world smaller. A smaller world means that people are more aware of events outside of their home country, and are more likely to travel to other countries. 92
  • Increased awareness and travel result in a better understanding of foreign opportunities. A better understanding of opportunities leads to increases in international trade and investment, and the number of businesses operating across national borders. These increases mean that the economies around the world are more closely integrated.Managers must be conscious that markets, supplies, investors, locations,partners, and competitors can be anywhere in the world. Successfulbusinesses will take advantage of opportunities wherever they are and willbe prepared for downfalls. Successful managers, in this environment, needto understand the similarities and differences across national boundaries,in order to utilize the opportunities and deal with the potential downfalls.The globalization of business is easy to recognize in the spread of manybrands and services throughout the world. For example, Japaneseelectronics and automobiles are common in Asia, Europe, and NorthAmerica, while U.S. automobiles, entertainment, and financial services arealso common in Asia, Europe, and North America. Moreover, companieshave become transnational or multinational-that is, they are based in onecountry but have operations in others. For example, Japan-basedautomaker Honda operates the largest single factory in the United States,while U.S. based Coca-Cola operates plants in other countries includingFrance and Belgium—with about 80 percent of that companys profits comefrom overseas sales. 93
  • In developing appropriate global strategies, managers need totake the benefits and drawbacks of globalization into account. A globalstrategy must be in the context of events around the globe, as well as thoseat home.International strategy is the continuous and comprehensive managementtechnique designed to help companies operate and compete effectivelyacross national boundaries. While companies top managers typicallydevelop global strategies, they rely on all levels of management in order toimplement these strategies successfully. The methods companies use toaccomplish the goals of these strategies take a host of forms. For example,some companies form partnerships with companies in other countries,others acquire companies in other countries, others still develop products,services, and marketing campaigns designed to 94
  • Differences between Domestic and International StrategyFactors Domestic Conditions Global Conditions Culture Homogeneous Heterogeneous Currency Uniform Different currencies and exchange rates Economy Stable and uniform May be variable and unpredictableGovernment Stable May be unstable Labor Skilled workers available Skilled workers may be hard to find Language Generally a single Different languages and language dialects Marketing Many media, few May be fewer media and more restrictions restrictions Transport Several competitive modes May be inadequate 95
  • Appeal to customers in other countries. Some rudimentaryaspects of international strategies mirror domestic strategies in thatcompanies must determine what products or services to sell, where andhow to sell them, where and how they will produce or provide them, andhow they will compete with other companies in the industry in accordancewith company goals. The development of international strategies entails attention toother details that seldom, if ever, come into play in the domestic market.These other areas of concern stem from cultural, geographic, and politicaldifferences. Consequently, while a company only has to develop a strategytaking into account known governmental regulations, one language(generally), and one currency in a domestic market, it must consider andplan for different levels and kinds of governmental regulation, multiplecurrencies, and several languages in the global market.TYPES OF GLOBAL BUSINESS ACTIVITIES Businesses may choose to globalize or operate in differentcountries in four distinct ways: through trade, investment, strategicalliances, and licensing or franchising. Companies may decide to tradetangible goods such as automobiles and electronics (merchandise exportsand imports). Alternatively, companies may decide to trade intangibleproducts such as financial or legal services (service exports and imports). 96
  • Companies may enter the global market through various kinds ofinternational investments. Companies may choose to make foreign directinvestments, which allow them to control companies and assets in othercountries. In addition, companies may elect to make portfolio investments,by acquiring the stock of companies in other countries in order to gaincontrol of these companies. Another way companies tap into the global market is by formingstrategic alliances with companies in other countries. While strategicalliances come in many forms, some enable each company to access thehome market of the other and thereby market their products as beingaffiliated with the well-known host company. This method of internationalbusiness also enables a company to bypass some of the difficultiesassociated with internationalization such as different political, regulatory,and social conditions. The home company can help the multinationalcompany address and overcome these difficulties because it is accustomedto them. Finally, companies may participate in the international market byeither licensing or franchising. Licensing involves granting anothercompany the right to use its brand names, trademarks, copyrights, orpatents in exchange for royalty payments. Franchising, on the other hand,is when one company agrees to allow a company in another country to useits name and methods of operations in exchange for royalty payments. 97
  • INTERNATIONAL STRATEGY DEVELOPMENT Generally, a company develops its international strategy byconsidering its overall strategy, which includes its operations at home andabroad. We can consider four aspects of strategy: 1. Scope of operations, 2. Resource allocation, 3. Competitive advantage, and 4. Synergy. The first component encompasses the geographic locations—countries and regions—of possible operations as well as possible marketsor niches in various regions. Since companies have limited resources andsince different regions offer different advantages, managers must select themarkets that offer the company the optimal opportunities. The second component of the global strategy focuses on use ofcompany resources so that a company can compete successfully in thechosen markets. This component of strategy planning also determines therelative importance of various company functions and bases the allocationof resources on the relative importance of each function. For instance, acompany may decide to allocate its resources based on product lines orgeographical locations. 98
  • Next, management must decide where the company can achievecompetitive advantage over other companies in the industry. Managementcan identify their competitive advantage by determining what thecompany does better (or can do better) than its competitors. Companiesmay realize this advantage through a host of techniques such as usingsuperior technology, implementing more efficient organizational practicesand distribution systems, and cultivating well-known brands. Thiscomponent of the strategy involves not only identifying existing orpotential areas of competitive advantage but also developing a plan forsustaining areas of competitive advantage. Finally, global strategy shouldinvolve establishing a plan for the company that enables its variousfunctions and operations to benefit one another. For example, a companycan use one line of products to encourage sales of another line of productsand thereby enabling different parts of a business to benefit from eachother. Many companies are now outsourcing many of their operationsinternationally. For example, if you call to get information on your creditcard, you may well be talking to someone in India or Mexico. Equally,manufacturers often outsource production to low labor cost countries.Concerns over ethical issues, such as slave and child labor, have led tocompanies outsourcing under controlled conditions—offshore productionmay be subject to surprise visits and searches and outsourced factories arerequired to conform to specific criteria. 99
  • STAGES OF INTERNATIONAL STRATEGY DEVELOPMENT Strategy development itself generally takes places in two stages:strategy formulation and strategy implementation. When planning astrategy, companies identify their international objectives and put togethera strategy that will enable them to realize their goals. During the planningstage managers propose, revise, and finally ratify plans for entering newmarkets and competing in them. After a strategy has been agreed on, managers must take steps tohave it implemented. Consequently, this stage involves determining whento begin global operations as well as actually starting operations andputting into action the other components of the global strategy. More specifically, the first stage—strategy formulation—entailsanalysis of the company and its environment, establishing strategic goals,and developing plans to achieve goals as well as a control framework. Byassessing itself and the global business environment, a company candetermine what markets, products, services, etc. offer opportunities forgrowth. This process involves the collection of data on a company and itsenvironment, including information on global markets, regulation,productivity, costs, and competitors. Therefore, the collection of datashould supply managers with economic, financial, political, legal, andsocial information on various countries and their markets for differentproducts or services. Based on this information, managers can determine 100
  • what markets and products offer economically feasible opportunities forglobal expansion. Once this analysis is complete, managers must establish strategicgoals, which are the significant goals a company seeks to achieve through aparticular pursuit such as entering a new regional market. These goalsmust be practicable, measurable, and limited to a specific time frame. Afterthe strategic goals have been established, companies should develop plansthat allow them to accomplish their goals, and these plans shouldconcentrate on how to implement strategic plans. Finally, strategy formulation involves a control framework, whichis a process management uses to help ensure that a company remains onthe right course when implementing its strategic plans. The controlframework essentially responds to various developments while thestrategic plans are being implemented. For example, if sales are lower thanthe projected sales that are part of the strategic goals, then a companymight increase its marketing efforts and temporarily lower its prices tostimulate additional sales.Factors affecting Global Compensation & Benefits:Businesses are affected by an external environment as much as they areaffected by the competitors. Global factors influencing business are legal,political, social, technological and economic. Understanding of thesefactors is important while developing a business strategy. 101
  • a. Social factors - These factors are related to changes in social structures.These factors provide insights into behavior, tastes, and lifestyles patternsof a population. Buying patterns are greatly influenced by the changes inthe structure of the population, and in consumer lifestyles. Age, gender, etcall determine the buying patterns and understanding of such changes iscritical for developing strategies which are in line with the marketsituations. In a global environment it is important that business strategiesare designed keeping in mind the social and cultural differences that varyfrom country to country. Consumer religion, language, lifestyle patternsare all important information for successful business management.b. Legal factors - These factors that influence business strategies are relatedto changes in government laws and regulations. For a successful businessoperation it is important that the businesses consider the legal issuesinvolved in a particular situation and should have the capability toanticipate ways in which changes in laws will affect the way they mustbehave. Laws keep changing over a period of time. From the point of viewof business it is important that they are aware of these changes in the areasof consumer protection legislation, environmental legislation, health &safety and employment law, etc.c. Economic factors - These factors involve changes in the global economy.A rise in living standards would ultimately imply an increase in demandfor products thereby, providing greater opportunities for businesses tomake profits. An economy witnesses fluctuations in economic activities.This would imply that in case of a rise in economic activity the demand of 102
  • the product will increase and hence the price will increase. In case ofreduction in demand the prices will go down. Business strategies should bedeveloped keeping in mind these fluctuations. Other economic changesthat affect business include changes in the interest rate, wage rates, and therate of inflation. Incase of low interest rates and increase in demandBusinesses will be encouraged to expand and take risks. Therefore,business strategies should have room for such fluctuations.d. Political factors - This refers to the changes in government andgovernment policies. Political factors greatly influence the operation ofbusiness. This has gained significant importance off late. For example:companies operating in the European Union have to adopt directives andregulations created by the EU. The political arena has a huge influenceupon the regulation of businesses, and the spending power of consumersand other businesses. Business must consider the stability of the politicalenvironment, government‘s policy on the economy etc.e. Technological factors - These factors greatly influence businessstrategies as they provide opportunities for businesses to adopt newinnovations, and inventions. This helps the business to reduce costs anddevelop new products. With the advent of modern communicationtechnologies, technological factors have gained great impetus in thebusiness arena. . Huge volumes of information can be securely shared bymeans of databases thereby enabling vast cost reductions, andimprovements in service. Organizations need to consider the latest relevanttechnological advancements for their business and to stay competitive. 103
  • Technology helps business to gain competitive advantage, and is a majordriver of globalization. While designing the business strategies firms mustconsider if use of technology will allow the firm to manufacture productsand services at a lower cost. Firms can select new modes of distributionswith the help of technology. It has become easier for companies tocommunicate with their customer in any part of the world.CONCLUSION: Today, business is acknowledged to be international and there is ageneral expectation that this will continue for the foreseeable future.International business may be defined simply as business transactions thattake place across national borders. This broad definition includes the verysmall firm that exports (or imports) a small quantity to only one country, aswell as the very large global firm with integrated operations and strategicalliances around the world. Within this broad array, distinctions are oftenmade among different types of international firms, and these distinctionsare helpful in understanding a firms strategy, organization, and functionaldecisions (for example, its financial, administrative, marketing, humanresource, or operations decisions). One distinction that can be helpful is the distinction between multi-domestic operations, with independent subsidiaries which act essentiallyas domestic firms, and global operations, with integrated subsidiarieswhich are closely related and interconnected. These may be thought of asthe two ends of a continuum, with many possibilities in between. 104
  • Q. 5 (b) Describe the growth of any international business through related diversification and through unrelated diversification.Answer: Diversification is a form of corporate strategy for a company. Itseeks to increase profitability through greater sales volume obtained fromnew products and new markets. Diversification can occur either at thebusiness unit level or at the corporate level. At the business unit level, it ismost likely to expand into a new segment of an industry which thebusiness is already in. It is also very interesting entering a promisingbusiness outside of the scope of the existing business unit.Diversification is part of the four main marketing strategies defined by the Product/Market 105
  • A Diversification strategy stands apart from the other threestrategies. The first three strategies are usually pursued with the sametechnical, financial, and merchandising resources used for the originalproduct line, whereas diversification usually requires a company to acquirenew skills, new techniques and new facilities.Note: The notion of diversification depends on the subjective interpretationof ―new‖ market and ―new‖ product, which should reflect the perceptionsof customers rather than managers. Indeed, products tend to create orstimulate new markets; new markets promote product innovation. Diversification has been an essential basis for the growth andsurvival of firms in the last half of the twentieth century, due to thevulnerability of the specialized firm to the fast and unexpected changes inthe environment.What Does Diversification Mean? A risk management technique that mixes a wide variety ofinvestments within a portfolio. The rationale behind this techniquecontends that a portfolio of different kinds of investments will, on average,yield higher returns and pose a lower risk than any individual investmentfound within the portfolio. Diversification strives to smooth outunsystematic risk events in a portfolio so that the positive performanceof some investments will neutralize the negative performance of others.Therefore, the benefits of diversification will hold only if the securities inthe portfolio are not perfectly correlated. 106
  • Why Diversification? A diversification analysis needs to demonstrate that the businesswill achieve a return on the investment that more than compensates for therisk. A business owner needs to consider efficient diversificationstrategies to build a competitive advantage, to achieve economies of scaleor scope, and/or to take advantage of a financial opportunity that alignswith the business strategic plan.The two principal objectives of diversification are a. Improving core process execution, and/or b. Enhancing a business units structural position. The fundamental role of diversification is for corporate managers to create value for stockholders in ways stockholders cannot do better for themselves. The additional value is created through synergetic integration of a new business into the existing one thereby increasing its competitive advantage. 107
  • The Role of Diversification: Diversification strategies play a major role in the behavior oflarge firms.Product diversification concerns:  The scope of the industries and markets in which the firm competes.  How managers buy, create and sell different businesses to match skills and strengths with opportunities presented to the firm.Two Strategy Levels: 1. Business-level Strategy (Competitive) Each business unit in a diversified firm chooses a business-level strategy as its means of competing in individual product markets. 108
  • 2. Corporate-level Strategy (Companywide) Specifies actions taken by the firm to gain a competitive advantage by selecting and managing a group of different businesses competing in several industries and product markets.Two types of DiversificationDiversification can be segmented into related diversification or unrelateddiversification.What is related Diversification? It is when a business adds or expands its existing product lines ormarkets. For example, a phone company that adds or expands its wirelessproducts and services by purchasing another wireless company isengaging in related diversification. With a related diversification strategy you have the advantage ofunderstanding the business and of knowing what the industryopportunities and threats are; yet a number of related acquisitions fail toprovide the benefits or returns originally predicted. Why? It is usually because the diversification analysis under-estimates the cost of some of the softer issues: change management,integrating two cultures, handling employees – layoffs and terminations,promotions, and even recruitment. And on the other side, the diversificationanalysis might over-estimate the benefits to be gained in synergies.Related Diversification is when a firm expands into several distinct product 109
  • lines or business lines, yet, these lines have similarities or commonalities.The similarities and commonalities are in their technologies , managerialand manpower skills , market and sales , distribution , customer base ,suppliers and materials sources , operation processes , brand andreputation , and other opportunities in the business value chain . There arevaried reasons for diversification but a commonone would be - competitive advantage.Advantages 1. A firm can capitalize on its strengths and on areas where they are best at and transfer these competencies to another business 2. In synergizing, businesses can increase their collective value which would be more than their individual or separate value 3. Reduces risk when the organization is less dependent on just one business activity 4. Reduces cost when firms share resources and activities common to the businesses 110
  • 5. There will be knowledge sharing and skills transfer which will be of common gain and benefit for businesses. Disadvantages 1. Shared risks, in some cases, where diversification is extensive. Different industries have different and unpredictable business cycles 2. Shared losses when there are no strong commonalities to leverage competencies and during economic downturns when all industries will be hit altogether 3. High bureaucratic costs of diversification.What is unrelated Diversification? It is when a business adds new, or unrelated, product lines ormarkets. For example, the same phone company might decide to go intothe television business or into the radio business. This is unrelateddiversification: there is no direct fit with the existing business. Why would a company want to engage in unrelated diversification?Because there may be cost efficiencies. Or the acquisition might provide anoffsetting cash flow during a seasonal lull. The driver for this acquisitiondecision is profit – it needs to be a low risk investment, with high potentialfor return. 111
  • Advantages 1. Stable corporate-level performance over time due to business cycle differences among the multiple businesses. 2. Resources can be allocated to areas with the highest return potentials to maximize corporate performance.Disadvantages 1. The strategy does not usually lead to high performance due to the complexity of managing a diversity of businesses. 2. Firms with unrelated strategies fail to exploit important synergies, putting them at a competitive disadvantage to firms with related diversification strategies.Efficient Diversification:Ensure that you review the costs and benefits of investment  In new equipment;  In labor saving costs;  In improving productivity and/or workflow;  In serving existing customers better and more profitably;  In diversifying by adding new products and services and/or new markets;  By addressing safety and/or environmental issues; and more. 112
  • Diversification Strategy Diversification strategies are used to expand firms operations byadding markets, products, services, or stages of production to the existingbusiness. The purpose of diversification is to allow the company to enterlines of business that are different from current operations. When the newventure is strategically related to the existing lines of business, it is calledconcentric diversification. Conglomerate diversification occurs when thereis no common thread of strategic fit or relationship between the new andold lines of business; the new and old businesses are unrelated. 113
  • Diversification in the Context Of Growth Strategies Diversification is a form of growth strategy. Growth strategiesinvolve a significant increase in performance objectives (usually sales ormarket share) beyond past levels of performance. Many organizationspursue one or more types of growth strategies. One of the primary reasonsis the view held by many investors and executives that "bigger is better."Growth in sales is often used as a measure of performance. Even if profitsremain stable or decline, an increase in sales satisfies many people. Theassumption is often made that if sales increase, profits will eventuallyfollow. 114
  • Rewards for managers are usually greater when a firm is pursuinga growth strategy. Managers are often paid a commission based on sales.The higher the sales level, the larger the compensation received.Recognition and power also accrue to managers of growing companies.They are more frequently invited to speak to professional groups and aremore often interviewed and written about by the press than are managersof companies with greater rates of return but slower rates of growth. Thus,growth companies also become better known and may be better able, toattract quality managers. 115
  • Growth may also improve the effectiveness of the organization.Larger companies have a number of advantages over smaller firmsoperating in more limited markets. 1. Large size or large market share can lead to economies of scale. Marketing or production synergies may result from more efficient use of sales calls, reduced travel time, reduced changeover time, and longer production runs. 2. Learning and experience curve effects may produce lower costs as the firm gains experience in producing and distributing its product or service. Experience and large size may also lead to improved layout, gains in labor efficiency, redesign of products or production processes, or larger and more qualified staff departments (e.g., marketing research or research and development). 3. Lower average unit costs may result from a firms ability to spread administrative expenses and other overhead costs over a larger unit volume. The more capital intensive a business is, the more important its ability to spread costs across a large volume becomes. 4. Improved linkages with other stages of production can also result from large size. Better links with suppliers may be attained through large orders, which may produce lower costs (quantity discounts), improved delivery, or custom-made products that would be unaffordable for smaller operations. Links with distribution channels may lower costs by better location of warehouses, more efficient advertising, and shipping efficiencies. The size of the organization 116
  • relative to its customers or suppliers influences its bargaining power and its ability to influence price and services provided.5. Sharing of information between units of a large firm allows knowledge gained in one business unit to be applied to problems being experienced in another unit. Especially for companies relying heavily on technology, the reduction of R&D costs and the time needed to develop new technology may give larger firms an advantage over smaller, more specialized firms. The more similar the activities are among units, the easier the transfer of information becomes.6. Taking advantage of geographic differences is possible for large firms. Especially for multinational firms, differences in wage rates, taxes, energy costs, shipping and freight charges, and trade restrictions influence the costs of business. A large firm can sometimes lower its cost of business by placing multiple plants in locations providing the lowest cost. Smaller firms with only one location must operate within the strengths and weaknesses of its single location. 117
  • Concentric Diversification Concentric diversification occurs when a firm adds relatedproducts or markets. The goal of such diversification is to achieve strategicfit. Strategic fit allows an organization to achieve synergy. In essence,synergy is the ability of two or more parts of an organization to achievegreater total effectiveness together than would be experienced if the effortsof the independent parts were summed. Synergy may be achieved bycombining firms with complementary marketing, financial, operating, ormanagement efforts. Breweries have been able to achieve marketingsynergy through national advertising and distribution.By combining a number of regional breweries into a national network, beerproducers have been able to produce and sell more beer than hadindependent regional breweries. Financial synergy may be obtained by combining a firm withstrong financial resources but limited growth opportunities with acompany having great market potential but weak financial resources. Forexample, debt-ridden companies may seek to acquire firms that arerelatively debt-free to increase the lever-aged firms borrowing capacity.Similarly, firms sometimes attempt to stabilize earnings by diversifyinginto businesses with different seasonal or cyclical sales patterns. 118
  • Strategic fit in operations could result in synergy by thecombination of operating units to improve overall efficiency. Combiningtwo units so that duplicate equipment or research and development areeliminated would improve overall efficiency. Quantity discounts throughcombined ordering would be another possible way to achieve operatingsynergy. Yet another way to improve efficiency is to diversify into an areathat can use by-products from existing operations. For example, brewerieshave been able to convert grain, a by-product of the fermentation process,into feed for livestock. 119
  • Management synergy can be achieved when managementexperience and expertise is applied to different situations. Perhaps amanagers experience in working with unions in one company could beapplied to labor management problems in another company. Caution mustbe exercised, however, in assuming that management experience isuniversally transferable. Situations that appear similar may requiresignificantly different management strategies. Personality clashes and othersituational differences may make management synergy difficult to achieve.Although managerial skills and experience can be transferred, individualmanagers may not be able to make the transfer effectively.Conglomerate Diversification Conglomerate diversification occurs when a firm diversifiesinto areas that are unrelated to its current line of business. Synergy mayresult through the application of management expertise or financialresources, but the primary purpose of conglomerate diversification isimproved profitability of the acquiring firm. Little, if any, concern is givento achieving marketing or production synergy with conglomeratediversification. One of the most common reasons for pursuing a conglomerategrowth strategy is that opportunities in a firms current line of business arelimited. Finding an attractive investment opportunity requires the firm toconsider alternatives in other types of business. Philip Morriss acquisitionof Miller Brewing was a conglomerate move. Products, markets, and 120
  • production technologies of the brewery were quite different from thoserequired to produce cigarettes. Firms may also pursue a conglomerate diversification strategy asa means of increasing the firms growth rate. As discussed earlier, growthin sales may make the company more attractive to investors. Growth mayalso increase the power and prestige of the firms executives. Conglomerategrowth may be effective if the new area has growth opportunities greaterthan those available in the existing line of business. Probably the biggest disadvantage of a conglomeratediversification strategy is the increase in administrative problemsassociated with operating unrelated businesses. Managers from differentdivisions may have different backgrounds and may be unable to worktogether effectively. Competition between strategic business units forresources may entail shifting resources away from one division to another.Such a move may create rivalry and administrative problems between theunits. Caution must also be exercised in entering businesses withseemingly promising opportunities, especially if the management teamlacks experience or skill in the new line of business. Without someknowledge of the new industry, a firm may be unable to accuratelyevaluate the industrys potential. Even if the new business is initiallysuccessful, problems will eventually occur. Executives from theconglomerate will have to become involved in the operations of the new 121
  • enterprise at some point. Without adequate experience or skills(Management Synergy) the new business may become a poor performer. Without some form of strategic fit, the combined performance ofthe individual units will probably not exceed the performance of the unitsoperating independently. In fact, combined performance may deterioratebecause of controls placed on the individual units by the parentconglomerate. Decision-making may become slower due to longer reviewperiods and complicated reporting systems.Diversification: Grow Or Buy? Diversification efforts may be either internal or external. Internaldiversification occurs when a firm enters a different, but usually related,line of business by developing the new line of business itself. Internaldiversification frequently involves expanding a firms product or marketbase. External diversification may achieve the same result; however, thecompany enters a new area of business by purchasing another company orbusiness unit. Mergers and acquisitions are common forms of externaldiversification.Internal Diversification One form of internal diversification is to market existing productsin new markets. A firm may elect to broaden its geographic base to includenew customers, either within its home country or in international markets.A business could also pursue an internal diversification strategy by finding 122
  • new users for its current product. For example, Arm & Hammer marketedits baking soda as a refrigerator deodorizer. Finally, firms may attempt tochange markets by increasing or decreasing the price of products to makethem appeal to consumers of different income levels. Another form of internal diversification is to market new productsin existing markets. Generally this strategy involves using existingchannels of distribution to market new products. Retailers often changeproduct lines to include new items that appear to have good marketpotential. Johnson & Johnson added a line of baby toys to its existing line ofitems for infants. Packaged-food firms have added salt-free or low-calorieoptions to existing product lines. It is also possible to have conglomerate growth through internaldiversification. This strategy would entail marketing new and unrelatedproducts to new markets. This strategy is the least used among the internaldiversification strategies, as it is the most risky. It requires the company toenter a new market where it is not established. The firm is also developingand introducing a new product. Research and development costs, as wellas advertising costs, will likely be higher than if existing products weremarketed. In effect, the investment and the probability of failure are muchgreater when both the product and market are new. 123
  • External Diversification External diversification occurs when a firm looks outside of itscurrent operations and buys access to new products or markets. Mergersare one common form of external diversification. Mergers occur when twoor more firms combine operations to form one corporation, perhaps with anew name. These firms are usually of similar size. One goal of a merger isto achieve management synergy by creating a stronger management team.This can be achieved in a merger by combining the management teamsfrom the merged firms. Acquisitions, a second form of external growth, occur when thepurchased corporation loses its identity. The acquiring company absorbs it.The acquired company and its assets may be absorbed into an existingbusiness unit or remain intact as an independent subsidiary within theparent company. Acquisitions usually occur when a larger firm purchasesa smaller company. Acquisitions are called friendly if the firm beingpurchased is receptive to the acquisition. (Mergers are usually "friendly.")Unfriendly mergers or hostile takeovers occur when the management ofthe firm targeted for acquisition resists being purchased.Diversification: Vertical or Horizontal? Diversification strategies can also be classified by the direction ofthe diversification. Vertical integration occurs when firms undertakeoperations at different stages of production. Involvement in the differentstages of production can be developed inside the company (internal 124
  • diversification) or by acquiring another firm (external diversification).Horizontal integration or diversification involves the firm moving intooperations at the same stage of production. Vertical integration is usuallyrelated to existing operations and would be considered concentricdiversification. Horizontal integration can be either a concentric or aconglomerate form of diversification.Vertical Integration The steps that a product goes through in being transformed fromraw materials to a finished product in the possession of the customerconstitute the various stages of production. When a firm diversifies closerto the sources of raw materials in the stages of production, it is following abackward vertical integration strategy. Avons primary line of business hasbeen the selling of cosmetics door-to-door. Avon pursued a backward formof vertical integration by entering into the production of some of itscosmetics. Forward diversification occurs when firms move closer to theconsumer in terms of the production stages. Levi Strauss & Co.,traditionally a manufacturer of clothing, has diversified forward byopening retail stores to market its textile products rather than producingthem and selling them to another firm to retail. Backward integration allows the diversifying firm to exercisemore control over the quality of the supplies being purchased. Backwardintegration also may be undertaken to provide a more dependable sourceof needed raw materials. Forward integration allows a manufacturing 125
  • company to assure itself of an outlet for its products. Forward integrationalso allows a firm more control over how its products are sold andserviced. Furthermore, a company may be better able to differentiate itsproducts from those of its competitors by forward integration. By openingits own retail outlets, a firm is often better able to control and train thepersonnel selling and servicing its equipment. Some firms employ vertical integration strategies to eliminate the"profits of the middleman." Firms are sometimes able to efficiently executethe tasks being performed by the middleman (wholesalers, retailers) andreceive additional profits. However, middlemen receive their income bybeing competent at providing a service. Unless a firm is equally efficient inproviding that service, the firm will have a smaller profit margin than themiddleman. If a firm is too inefficient, customers may refuse to work withthe firm, resulting in lost sales. Vertical integration strategies have one major disadvantage. Avertically integrated firm places "all of its eggs in one basket." If demandfor the product falls, essential supplies are not available, or a substituteproduct displaces the product in the marketplace, the earnings of the entireorganization may suffer. 126
  • Horizontal Diversification Horizontal integration occurs when a firm enters a new business(either related or unrelated) at the same stage of production as its currentoperations. For example, Avons move to market jewelry through its door-to-door sales force involved marketing new products through existingchannels of distribution. An alternative form of horizontal integration thatAvon has also undertaken is selling its products by mail order (e.g.,clothing, plastic products) and through retail stores (e.g., Tiffanys). In bothcases, Avon is still at the retail stage of the production process.Diversification Strategy and Management Teams As documented in a study by Marlin, Lamont, and Geiger,ensuring a firms diversification strategy is well matched to the strengths ofits top management team members factored into the success of thatstrategy. For example, the success of a merger may depend not only onhow integrated the joining firms become, but also on how well suited topexecutives are to manage that effort. The study also suggests that differentdiversification strategies (concentric vs. conglomerate) require differentskills on the part of a companys top managers, and that the factors shouldbe taken into consideration before firms are joined. There are many reasons for pursuing a diversification strategy, butmost pertain to managements desire for the organization to grow.Companies must decide whether they want to diversify by going intorelated or unrelated businesses. They must then decide whether they want 127
  • to expand by developing the new business or by buying an ongoingbusiness. Finally, management must decide at what stage in the productionprocess they wish to diversify.Reasons for Diversification 1. Efficiency gains, where an organization has underutilized resources and competences that it cannot effectively close or sell then it make business sense to use the resources and competences by diversifying into a new activity. 2. Increasing market power, an organization can afford to cross- subsidize one business from the surpluses earned by another in a way that competitors may not be able to. 3. Stretching corporate parenting capabilities into markets and products. 4. Responding to market decline 5. Spreading risk 128